Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)

Key point

  • Courts can imply a term of perform a contract in good faith

Facts

  • Under a distribution contract, ITC (D) gave rights to Yam Seng (C) to distribute fragrances bearing ‘Manchester United’ in Asia
  • C alleged breach of contract as orders were not shipped promptly, and that D offered the same products for sale at a lower price in Asia and provided false information it knew C would rely on for marketing
  • C sought a declaration that there was an implied term for good faith in the performance of the contract and that the term was breached

Held (High Court)

  • The duty of good faith was implied and was breached by D
  • A duty of good faith is not too uncertain to be implied into contracts

Legatt J

Good faith in English law

  • The general view is that good faith is not recognised in English contract law
  • Three main justifications are given
    1. English law proceeds incrementally and does not enforce broad overarching principles
    2. English law embodies an ethos of individualism, parties are free to pursue their own self-interest without breaching the contract
    3. Recognising good faith would create too much uncertainty, the content of obligation would be vague and subjective

Reasons for recognition

Legatt J argues that good faith should be recognised in English law and hostility is misplaced for the following reasons:

Refusing to recognise good faith was ‘swimming against the tide’

  • Good faith is introduced into UK law via European directives including the Unfair Terms in Consumer Contract Regulations 1999
  • Good faith has been recognised in other common law countries such as the US, Australia and Canada, showing that it is not “antithetical to Anglo-Saxon individualism”

English law recognises good faith as an incident of certain categories of contract

  • In employment contracts the courts have implied a fiduciary duty owed by the employee to the employer
  • A duty of honesty has been implied in insurance contracts (HIH Casualty v Chase Manhattan Bank)
  • Thus, there should be no difficulty in implying a duty of good faith contracts, since features of it has already been implied

It carries a duty of disclosure into relational contracts

  • Good faith has the core value of honesty, which prohibits deception, as well as omission to disclose information
  • English law has recognised a duty to disclose in certain fiduciary relationships such as partnership and trusteeship, outside of which no duty of disclosure operates
  • However, long term relational contracts (e.g. joint venture agreements, franchise agreements, long term distributorship agreements) require a high degree of communication and cooperation based on mutual trust, and would benefit from a duty of disclosure

Other reasons

  • There is no real restriction of the parties’ freedom of contract as they are free to contract out of the implied term of good faith by express words
  • Since the content of good faith varies with the context in which it applies, it is aligned with the incremental approach of the common law

Proposed test for breach of good faith

  • Whether ‘conduct would be regarded as commercially unacceptable by reasonable and honest people’
  • The content of good faith varies with the context
  • Its objective nature follows from the fact that the content of the duty of good faith is established by a process of construction which is based on an objective principle

Current case

  • In the present case the relevant content of the duty of good faith are captured by two specific terms:
    • A duty not to give false information, for which there was a breach
    • A duty not to undercut prices, for which there was no breach

Commentary

  • The good faith requirement in the Unfair Terms in Consumer Contract Regulations 1999 is now contained in the Consumer Rights Act Part 2: under s62, a term in a consumer contract is deemed unfair and therefore void if, “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer”